To make this a bit easier for those who may visit here, I have decided to put my original thoughts, and some new ones, into question and answer form (sort of like a FAQ). Please remember that for many years I was a full time class action lawyer, and that I therefore tend to see these matters from a pro-class action viewpoint. Nonetheless, what is set forth below is intended to be a collection of frank answers to the tough questions shareholders often pose.
Q1. Why do these cases so often seem to settle for pennies on the dollar?
A1. Many cases do settle for larger amounts, but these get little publicity since everyone is happy. It is true that many other cases result in settlements that are far short of a full recovery. Couldn't the lawyers have at least gotten close to a full recovery for everyone? A few things should be remembered: Huge frauds--the ones that get all the publicity--walk hand in hand with HUGE damages. It is not unusual for a company with a few tens of millions in cash or less to be hit with class actions which, if won, would result in hundreds of millions of damages. In these circumstances, if the case was pressed to its ultimate conclusion (a whopping and completely uncollectible jury verdict), the end result would be corporate and individual bankruptcy. Current shareholders would be wiped out; former shareholders would likewise get little or nothing.
Q2. Given that state of affairs, isn't it the case that the lawyers don't even try to get the best possible settlement; don't they only care about getting a large fee?
A2. Of course, every person likes to get paid for his work. But the accusation that class action lawyers care more about fees than about maximizing settlements has never made any sense to me. Since the attorney's fees are usually based on a percentage of a recovery, they would love to bring in more. If anything, these allegedly "greedy" lawyers are greedy to bring in the highest possible settlement because their fees are tied to the settlement amount.
Q3. If fees and good settlements are tied together, why aren't the settlements better?
A3. The ability to maximize a settlement is a function of several factors. The class members and their attorneys are not corporate insiders, and do not have access to corporate records, yet they are REQUIRED right at the outset to craft a Complaint that shows with particularity how a fraud was committed. Otherwise, the case is dismissed, even though the corporate records would show that a blatant fraud was perpetrated. If the Complaint is upheld by the Judge (many judges are former defense lawyers or corporate lawyers who are unsympathetic to shareholder complaints), then the attorneys often face years of uncompensated slogging through documents with the job of proving who knew what when. Many defendants are not courteous enough to have documented the true state of affairs, leaving the attorneys to cobble together a circumstantial case. If the case does get to a jury, and a verdict is returned for plaintiffs, it often proves uncollectible, or is overturned by appeal courts. Class counsel remember well the Apple Computer in which the jury entered a resounding verdict for plaintiffs against Apple President A.C. Markkula, only to see the verdict snatched away from them on appeal on the flimsiest grounds. Other examples abound. Given all of these obstacles, class counsel still has every incentive to get the best possible recovery.
Q4. But aren't the fees received at the end of the day still exorbitant?
A4. There is often talk of the high fees class action lawyers sometimes receive. It should be remembered, though, that the shareholders who act as plaintiffs traditionally have been unable to pay fees and costs. Therefore the lawyer must pay out of his own pocket to conduct the litigation. It is not uncommon for a class action team to advance millions of dollars chasing an uncertain recovery, and trying to keep even with a well-financed corporate defense team, which gets paid handsomely win, lose or draw. Often, as mentioned above, even good cases are tossed out by unsympathetic judges after huge sums are expended. Thus, the "huge" fees in cases which get so much play, are often greatly offset by the huge losses the attorneys sustain in lost cases. These lost cases get noted in the back pages of the financial press or, more likely, never get noted at all. [The article entitled: "Class Action Attorneys Lose $10 Million in Fight to Get Shareholder Recovery" somehow never gets written or published.]
NEXT MESSAGE: WHY ARE THESE ACTIONS NEEDED AT ALL?
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